A tinge of modesty would have helped
ISUSPECT THAT FOR many years investors, when engaging on crazy valuations, will be telling tales of the attempted and aborted listing of Sagarmatha Technologies on the JSE.
To participate in the listing, investors were required to take an enormous leap of faith that the directors of Sagarmatha could build rapidly on a small collection of fledgling, loss-making operations.
Putting anything between R3bn to R7.5bn into Sagarmatha would have given the directors a huge licence for deal making — which, of course, comes with large execution risks in terms of overpaying for assets in an eagerness to build cash flowgenerative platforms and operational scale.
To put it into some capital-raising context, African Rainbow Capital Investments (ARC) — which holds a substantial portfolio of investments, including some promising positions in the financial services and telecoms sectors — raised R4.3bn when it listed on the JSE last year. Let’s be honest, it carries a good deal more tangible value than Sagarmatha and, what’s more, its prime movers have outstanding track records in value creation and deal making.
In Sagarmatha’s case R3bn to R7.5bn is a heap of capital to raise on iffy operational assets, and an inordinately large sum to fork out for an executive team that is by JSE investment standards untested.
One has only to look at the R2bn raised by Brian Joffe for his new investment venture Long4Life. Joffe — arguably the best deal maker on the JSE, with an impeccable track record of building long-term value via acquisitions — was justifiably overwhelmed with investor support when Long4Life listed last year. He effectively had only one deal (Sorbet) in the bag. But that investment was scalable, operating in a defendable niche and on a decent margin, and it was cash-flow generative. It was a solid enough platform from which to launch Long4Life’s acquisitive thrust.
Sagarmatha is, by contrast, generating turnover of R283m to make an operating loss of R55m. And it wants to add the hugely unprofitable and heavily indebted newspaper operations of Sekunjalo Independent Media.
Sagarmatha’s first listing effort was astoundingly brazen. If it’s true that R4bn in commitments were received from investors, it should not be too long before the group, which needs capital to function in the same way I need regular caffeine shots to get through the day, returns to the market. I trust its next attempt to float on the JSE will be tinged with modesty and offer a more humble valuation of assets and prospects.
More importantly, I would like to see the listing mechanism not skewed to benefit existing shareholders and offering nothing more than high-risk blue sky to new shareholders.